As African nations march towards more formal, regulated economies, private equity is determined to play more than just a walk-on part. But there is still much to learn about doing business in this diverse region.

Private equity (PE) as an asset class has received reasonable prominence in Africa in recent times. New records are being set both at the levels of fund raising and sector diversity of investments. Africa is becoming increasingly investor-friendly!

Private equity investment might provide some exciting opportunities for your business, but it also comes with a number of challenges. Private equity is capital that is put into a new or growing business in return for part ownership of the business and a share of its profits. Private equity investors don’t typically want to be permanently involved in a business – they will step in for a few years and then exit by selling back their shares to the business, along with a return investment.

Growth, whether organic or inorganic (expansion by mergers and acquisitions), is often the most important driver of value. The main challenge management face in achieving ambitious targets is to assess the most optimal funding structure suitable for their company. There are several funding options available in our markets, these can be primarily categorized into debt and equity.

Seven of the world’s ten fastest growing economies are in Africa, 52 African cities have populations of over 1 million people and by 2040 it is expected that 1.1 billion Africans will be of working age. Africa has 60% of the world’s uncultivated, arable land; 56.7% of the world’s diamond (gemstone) production, 66% of the worlds’ cocoa production, 10% of the world’s oil reserves, 80-90% of the world’s platinum group metal reserves and 40% of the world’s gold reserves.

Africa’s private equity (PE) landscape is uncharted and at an early stage of development, however, it is growing steadily and giving good returns. In fact, according to a KPMG survey, a record amount of 25.7 billion rand ($3.03 billion) in PE money from Africa was returned to investors in 2011, up from R18.1 billion in 2010.

According to Dapo Okubadejo, the partner in charge of Corporate Finance & Financial Advisory Services at KPMG Nigeria:

“Africa is now viewed by PE houses and fund managers as a priority investment destination. As growth in other economies have slowed in recent years due to the 2008/9 recession and current crisis in the Eurozone, investors have been looking to emerging markets and economies that will provide higher return rates and Africa is continuously proving its business case for investment.”

As previously highlighted, private equity returns continue to outstrip quoted shares and it is certain that operational improvement in portfolio companies is a key component of value creation. Of our sample, 63% had been involved with a private equity-backed business which was subsequently sold and, of these, 77% had been sold for a profit.

According to the survey, the most important contributors to the value uplift were operational improvements and sales growth. Leverage and growth through acquisitions were much less important; highlighting perhaps the reality of the more difficult funding climate.

The survey research suggests the appointment of an effective chairman can make a significant contribution to the business through, among other things, ensuring the relationship between private equity and management remains collaborative.

The research revealed that 78% of respondents felt that the aim of private equity backers and management was well aligned at the start, but for close to one-third of our sample, the relationship worsened over time. Reasons given were usually related to private equity backers being unclear or changing their minds about the strategy for the business.

Most of the seasoned executives and non-executives interviewed for the survey had experienced situations where a business underperformed against plan. When the going gets tough, the relationship between management and private equity backers can come under strain.

When this happens, private equity directors naturally become concerned at the potential threat to the value of their investment and need to be very aware of how their skills can help, rather than make things worse. The non-executives and executives interviewed for this research suggested constructive actions that private equity directors could take to help address underperformance.

rivate equity firms’ core competency is doing deals, so their skill levels for the deal process are high. But their real understanding of, and strategy for, the businesses they acquire, is usually much weaker.” – Chairman, Electronics sector

Private equity directors vary widely in the way they interact with portfolio companies; some actions are helpful while others not. Respondents were very clear on the latter and from their experience gave advice on how to avoid common pitfalls.

As you would expect, operating partners need to have relevant senior managerial and sector expertise as well as strong interpersonal skills. Further, if they are really plugged into the private equity firm and have built up a mutual understanding through working together over time, this can make a real difference in the efficiency of how decisions are made.

The results of our research show a high degree of consensus on this topic, with private equity directors’ lack of operational or management experience seen as a weakness in the way they interact with portfolio companies. Over 70% of those interviewed said that having managerial, operational or sector experience would give private equity executives more insight into the reality of running a business and a greater empathy with management.

SA’s private equity sector last year shrugged off the global economic uncertainty with funds under management topping a record R115bn, including uncommitted funds of more than R34bn, KPMG said yesterday.

While the sector attracted investors seeking exposure to emerging markets, an executive at KPMG said other sub-Saharan African markets besides SA were drawing global private equity funds to regional opportunities.

NOT a single rand was raised in this country for investment in early-stage or venture capital-type investments last year. These are the investments that spawn new technologies out of which, if they are successful, new industries are grown and thousands of new jobs created. So why is there such a truly astonishing lack of investment? Speaking at the launch of the KPMG/ South African Venture Capital Association annual Private Equity Industry Performance Survey, KPMG director Warren Watkins told a meagre audience it wasn’t so much a lack of ideas and effort, since there is a more than adequate supply of these, but rather the comparative absence of incentives similar to those applied in other countries.

While the number of private equity deals declined from 547 to 521 last year, the value of investments increased by 32.2% to R15.6-billion, the latest KPMG and Southern African Venture Capital Association (Savca) venture capital and private equity industry performance survey showed on Tuesday. Of the R15.6-billion invested, R8.6-billion went into follow-on investments, with the remaining R7-billion targeting new investments.

SA’s private equity sector last year shrugged off the global economic uncertainty with funds under management topping a record R115bn, including uncommitted funds of more than R34bn, KPMG said yesterday.

While the sector attracted investors seeking exposure to emerging markets, an executive at KPMG said other sub-Saharan African markets besides SA were drawing global private equity funds to regional opportunities.